Mortgage Industry in for Overhaul?

In the wake of the subprime lending scandal and the Countrywide investigation -- not to mention Monday's announcement of the upcoming resignation of U.S. Housing and Urban Development Secretary Alphonso Jackson -- many lawmakers, academics and other observers are sounding off as to how the mortgage industry's problems should be corrected.

On Friday, I pointed to John Gapper's commentary in Financial Times regarding mortgage industry regulation, in which he warned lawmakers to take their time and not get in a hurry. Also on Friday, I spoke to Boston University law professor and securities expert Tamar Frankel, who says a Sarbanes-Oxley-like regulation regime is probably not the best way to deal with the subprime mortgage mess. The problems uncovered at Countrywide and other lenders have, she says, seeped into other areas of the financial industry:

[T]he securitization process affects the lenders and then those who buy the loans and convert them into securities. You have two sides. You have the lending market and the securities market, and then you combine them. If you contaminate one, it leads to contamination of the other.

Frankel says it's time for the mortgage industry to be better regulated, but less is more:

[N]umber one, I would create more liquidity. The regulators are really trying to do that now. Number two, I would create mechanisms to connect the borrowers with the lenders so they can restructure their mortgage loans. Right now many can't do that, but there must be some way to do it. Otherwise, we're going to have not only foreclosures, but empty homes and homeless people, and slums. We don't want any of those.

I also have a longer-term solution in mind. We should reduce the tax incentives to buy homes and increase the tax incentives for the middle class to rent homes. Then we should start to develop a culture of long-term rentals.

Given the positions that Gapper and Frankel have taken on the issue, I'm not sure that either was pleased to see news on Monday that Treasury Secretary Henry Paulson has proposed what have been called "sweeping rule changes" in the financial industry -- one of which would create a new regulator for the mortgage segment.

Paulson did urge Congress to implement the changes slowly over the long term. CNNMoney.com quotes him as follows:

I am not suggesting that more regulation is the answer. I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change.

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